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AGCO Corporation (AGCO - Analyst Report) posted fourth-quarter 2012 adjusted earnings of 99 cents per share, a 31% drop from the prior-year quarter’s earnings of $1.44 per share. The results, however, beat the Zacks Consensus Estimate of 98 cents.

On a reported basis, earnings plunged 64% to $1.04 per share from the prior-year quarter’s earnings of $2.90 per share. Earnings in the reported quarter include asset impairment charges of 22 cents per share and tax benefit of 27 cents per share, while the year-ago quarter’s earnings include a tax benefit of $1.46 per share associated with the acquisition of GSI.

On a reported basis, earnings for full-year 2012 were $5.30 per share compared with $5.95 posted in 2011.

Operational Updates

Revenues in the reported quarter increased 7.4% year over year to $2.7 billion and exceeded the Zacks Consensus Estimate of $2.6 billion. The growth was mainly driven by an increase in sales in South America and the Asia Pacific region.

Revenues for the full year increased 13.6% to roughly $10 billion from $8.8 billion in 2011.

The North American region’s sales jumped 9% year over year to $652.3 million in the quarter. Sales in South America went up 14.1% to $511.9 million. EAME (Europe, Africa, and Middle East) region sales improved 1.8% to $1,406.5 million. Sales in the Asia Pacific region inflated 49.1% to $132.7 million.

Cost of sales increased 9% to $2.17 billion in the fourth quarter from $1.99 billion in the year-ago quarter. Gross profit in the reported quarter was $527.8 million compared with $524.1 million in the prior-year quarter. Gross margin declined 130 basis points (bps) year over year to 19.5% in the quarter.

Selling, general and administrative expenses amounted to $284.5 million, a 15% year over year decline. Operating profit plummeted 36% to $118.9 million due to lower production and start-up costs. Consequently, operating margin contracted 290 bps year over year to 4.4% from the prior year quarter.

Financial Update
                                                    
Cash and cash equivalents increased 7.8% year over year to $781.3 million at the end of 2012. Long-term debt was $1.28 billion as of Dec 31, 2012, a 12% year-over-year decrease. Debt-to-capitalization ratio reduced to 36% as of Dec 31, 2012, from 48% as of Dec 31, 2011.

Cash flow from operating activities was $666.4 million in the quarter versus $725.9 million in the prior-year quarter. Capital expenditure increased 13% year-over-year to $340.5 million. The company had free cash flow of $325.9 million in the reported quarter, a 23% year over year decline.  

Outlook for 2013

AGCO expects adjusted earnings per share for 2013 to be in the range of $5.50-$5.75 based on higher crop prices and stable equipment demand. Its earnings forecast include a year-over-year increase in income tax expense of 40 cents per share.

The company is targeting revenues in a band of $10.2–$10.4 billion factoring in pricing benefits and neutral currency impact. It also believes that gross and operating margins will improve compared with 2012.

Our view

Investment in new products, including upgraded harvesting, high horsepower tractor and sprayer offerings will enhance AGCO’s presence in the Commonwealth of Independent States (CIS), Russia, China and Africa.

For 2013, the company is planning to spend in manufacturing facilities ensuring the improvement in productivity and growth. In addition, the Marktoberdorf plant in Germany will increase both production capacity and efficiency of the company.

AGCO retains a short-term Zacks Rank #3 (Hold).

Lindsay Corp (LNN - Analyst Report), Deere & Co (DE - Analyst Report) and Titan International Inc (TWI - Snapshot Report) also belong to the machinery and farm industry. While Lindsay retains a Zacks Rank #1(Strong Buy), Deere and Titan International hold a Zacks Rank #2 (Buy).
 

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